Tạp chí Chiến lược kinh doanh - quý IV / 2013

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model of customer response, yield-
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observation of real customers.
When Alfred Korzybski coined
the expression “the map is not the
territory” in his book Science and
Sanity back in 1933, he was writ-
ing about the tendency of people to
draw the wrong conclusions from
observations of the physical world.
Conceptual models in those days
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tists could understand them, or so
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days, computer-augmented mod-
els such as immersion labs are so
detailed, precise, and far-reaching
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sede reality. The map is truer than
the territory—or at least truer than
our perception of it.
These new digital tools are
designed to improve the ratio of
breakthroughs to breakdowns, and
they probably will. But they are
also likely to provide new ways for
companies to overcommit and over-
extend themselves. Thus, it’s fit-

ting that this issue should include
some sober looks at technologies
and methodologies. For example,
Booz & Company researchers Curt
Mueller, Andrew Schmahl, and
Andrew Tipping scrutinize the
same-day delivery of products (page
6). Their take? That bricks-and-
mortar stores, if they rethink their
distribution model, could gain an
unassailable competitive advantage.
Other stories in this issue ex-
amine platform market businesses
that link customers to one another
(page 9), the limits of Twitter-based
marketing (page 12), the slow ad-
vent of the digital grid for electric
power (page 14), and (with justifi-
able enthusiasm) the bundling of
healthcare services (page 26). Fi-
nally, in “A Skeptic’s Guide to 3D
Printing,” Tim Laseter and Jeremy
Hutchison-Krupat show how mod-
els of declining cost can predict the
evolutionary trajectory of any lead-
ing-edge technology (page 20).
In a world of powerful models,
we need quality management more
than ever. Eric Ries, author of The
Lean Startup, makes this point in

the issue’s Thought Leader inter-
view on page 90. He notes that suc-
cessful Silicon Valley startups are
paying more attention to the “bor-
ing stuff” of building managerial
capability, even as mature organiza-
tions are learning to flex new tools
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terested in doing the same, there’s
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Art Kleiner
Editor-in-Chief

Illustration by Lars Leetaru
The Map Is Truer than the Territory
comment editor’s letter
1
editor’s letter

Same-Day Delivery? Not So Fast
Curt Mueller, Andrew Schmahl, and Andrew Tipping
Traditional retailers can outshine their online
competitors in the distribution game.
The High Risk of Platform Markets
Dylan Minor

Companies like dating sites and online auctions that link
complementary partners can dominate for years or be
swept away in an instant.
Jonah Berger Is Over Twitter
Laura W. Geller
How the science of social transmission will help your
brand catch on—and why tweeting alone is not enough.
Waiting for the Digital Grid
Don Dawson, Earl Simpkins, and Josh Stillman
The modernized grid should revolutionize the way
electricity is distributed and used, but its potential
hasn’t yet been realized.
Let’s Stop Calling Them Leaders
Eric McNulty
Executives, officials, and managers should have to earn
the title of “leader,” not just expect to receive it.
s+b Trend Watch
Chinese Companies Reclaim “Made in China”
TECHNOLOGY
A Skeptic’s Guide to 3D Printing
Tim Laseter and Jeremy Hutchison-Krupat
Excitement about any new technology should be balanced
with the application of time-tested forecasting tools.
HEALTHCARE
Healthcare Shifts from à la Carte
to Prix Fixe
Gary D. Ahlquist, Minoo Javanmardian, and
Sanjay B. Saxena
A bundled approach to treatment offers higher quality,
lower costs, and a better experience for patients.

leading ideas
17
14
6
9
12
essays
26
20
18
32
9
63
COVER STORY: INNOVATION
The Global Innovation
1000: Navigating the
Digital Future
Barry Jaruzelski, John Loehr, and Richard Holman
Booz & Company’s annual study of R&D spending
reveals the tools that are transforming innova-
tion—from customer insight to product launch.
Profiling the Global Innovation 1000
The 10 Most Innovative Companies
ORGANIZATIONS & PEOPLE
Are You Your
Employees’ Worst
Enemy?
Kannan Ramaswamy and William Youngdahl
Many leaders inadvertently stand in the way
of superior performance. Here’s how to

avoid the hindrance trap.
Best Business
Books 2013
STRATEGY
Rebuilding the Temple Mount
Walter Kiechel III
COMPANY STORIES
Lessons in Failure
David K. Hurst
GLOBALIZATION
Here Come the New Competitors
John Jullens
DIGITIZATION
Three Harbingers of Change
Howard Rheingold
MARKETING
Is Your Brand Experienced?
Catharine P. Taylor
MANAGERIAL SELF-HELP
Influence, Inquiry, Action
Sally Helgesen
LEADERSHIP
Running the Detroit Three
James O’Toole



THE THOUGHT LEADER
INTERVIEW
Eric Ries

Paul Michelman
The author of The Lean Startup is
thinking big about the challenges
facing companies in an economy
driven by innovation.
END PAGE: RECENT RESEARCH
Conglomerates Bounce Back
Matt Palmquist
Borrowing clout gives large companies an
edge in a financial crisis.

Cover illustration by Craig & Karl
features
32
77
Issue 73, Winter 2013Published by Booz & Company
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leading ideas
6
strategy+business issue 73
distribution centers, bricks-and-
mortar retailers are actually better
positioned than e-tailers to deliver
products rapidly to customers. And
although our survey focused on the
U.S., we believe the findings are
applicable to other countries with
well-developed retail and transpor-
tation sectors. With the possibility

of free, ground-based, next-day
delivery to consumers, the tables
may be turning.
Paying and Waiting
To better understand online shop-
ping habits and expectations, we
asked consumers how much they
would be willing to pay for delivery,
and how long they would be willing
to wait for their order to arrive.
When it came to the first question,
the answer was pretty blunt across
the board: nothing or almost noth-
ing. Nearly half of our survey re-
spondents said they were unwilling
to pay any fee whatsoever for deliv-
ery, and only about 10 percent said
they would pay US$10 or more for
same-day delivery. This finding
confirmed earlier studies that have
shown that customers’ online pur-
chasing decisions often hinge on the
issue of free shipping.
Same-Day
Delivery?
Not So Fast
Traditional retailers
can outshine their
online competitors in
the distribution game.

by Curt Mueller, Andrew Schmahl,
and Andrew Tipping
O
ffering customers free same-
day delivery has long been
an elusive goal for e-tailers.
Their motivation is simple: If e-
tailers can give customers the near-
instant gratification of buying in a
store, they can eliminate one of the
most powerful advantages held by
their bricks-and-mortar competi-
tors. Alas, costs and complexity have
largely kept same-day delivery (de-
fined here as delivery between sunup
and sundown on a weekday) out of
reach and, at best, a niche offering.
There have been some notable
recent developments, however. In
July 2013, eBay unveiled an expan-
sion of its eBay Now same-day deliv-
ery service into more areas around
San Francisco and New York, with
plans for Chicago and Dallas. On
the heels of that announcement,
Amazon said it would hire an addi-
tional 5,000 workers to staff its in-
creasing number of U.S. fulfillment
centers. Both are competing with
Google Shopping Express, which

launched a pilot service offering
same-day delivery from a limited
group of participating retailers to
the San Francisco area in early 2013.
However, the demand for same-
day delivery might be weaker than
expected. According to a new Booz
& Company survey of more than
1,000 online shoppers in the United
States, most customers don’t neces-
sarily need same-day delivery and, in
fact, in many cases they don’t want
it. They are getting home from work,
going online, and placing an order.
But they don’t want the item to arrive
while they are making dinner or put-
ting their kids to bed, let alone have
it sit on their doorstep overnight.
This is where it gets interesting
for traditional retailers that are will-
ing to rethink their business model.
By using their hundreds or thou-
sands of physical storefronts as local
Leading
Ideas
leading ideas
Illustration by Edward McGowan
7
leading ideas
sity in a single, planned dispatch

minimizes the fuel, capital, and la-
bor costs involved in a delivery. Tra-
ditional low-cost delivery models
achieve density in two ways: long
line-haul moves (typically by trac-
tor-trailer) that allow companies to
use large depots to aggregate supply,
and overnight sorting at local deliv-
ery stations where incoming supply
can gradually amass from multiple
sources to fill delivery trucks. But
both of these models tend to slow
down delivery times.
E-tailers continue to wrestle
with this density problem, but tradi-
tional retailers—particularly na-
tional and regional retailers—have a
secret weapon that’s hiding in plain
sight: their retail storefronts, which
they can use as mini distribution
centers and sources of fulfillment for
local online demand (see Exhibit,
page 8).
For example, a national retailer
with several outlets in the Chicago
area might receive hundreds of on-
line orders from local customers af-
ter its warehouses are closed. But
with the right systems in place, the
company could identify which local

retail stores that have those items in
stock are still open. The company
could then direct sales staff to select
and package those items, and ar-
range for a local carrier to pick them
up from the store before the doors
close. The packages would go from
the store to the local delivery station
that evening, and the next morning
be loaded onto trucks in time for the
carrier’s normal local ground-deliv-
ery route. Even a smaller retailer
without the necessary sales volume
to justify a late-night, in-store carri-
er pickup could make the same over-
night guarantee if, for instance, an
employee dropped off the packages
at a local delivery station on his or
her way home from work.
How long are customers willing
to wait? Survey respondents indicat-
ed that overnight delivery was only 5
percent less valuable to them than
same-day delivery, and three-quar-
ters agreed or strongly agreed that
they would be more likely to pur-
chase goods from a retailer that of-
fered free next-day delivery than
from one that did not. The survey
also revealed that 60 percent of on-

line shoppers place most of their or-
ders after traditional working hours
(5 p.m. or later). Only 4 percent of
shoppers make their purchases by 9
a.m., and only another 14 percent
do so by noon.
Given these findings, the future
may not bode well for several
new, high-profile shipping offerings.
They are either too expensive or too
limited in their ability to accept
orders after business hours—or
both. For example, eBay Now’s ser-
vice levies a $5 fee. AmazonFresh
uses a subscription model, charging
customers in Los Angeles $299 per
year for “delivery by dinner” of or-
ders placed by 10 a.m. Some tradi-
tional retailers are also throwing
their hats in the ring. For a fee of
$15 per order, Nordstrom will de-
liver goods to customers in La Jolla,
Calif., Seattle, and Bellevue, Wash.,
by 7 p.m. if they are purchased by
1 p.m. that day. But these and other
attempts at same-day delivery are
likely to struggle to expand beyond
their narrow geographies.
The Storefront Advantage
The trick for traditional retailers is

to understand their positional ad-
vantage with regard to density (the
number of packages being handled
in a given geographic area). Free de-
livery depends on low delivery costs,
and low delivery costs depend on
density. This is because greater den-
leading ideas
8
strategy+business issue 73
traditional and digital offerings is
required to make a nationwide plan
for low-cost overnight delivery fea-
sible and capable of reaching its full
potential.
Enhance real-time inventory
management.
Inventory systems
must provide transparency into
where every SKU is located. This
detail must go beyond knowing
in which store an item can be found,
to knowing in which department,
down which aisle, and on which
particular shelf.
Optimize fulfillment systems.
Fulfillment systems are needed that
can immediately determine which
particular retail store can satisfy an
order. This decision requires balanc-

ing factors such as proximity to the
customer, current (and predicted)
inventory levels, and staff capacity
for selecting the ordered items and
packing them for pickup.
Create a flexible workforce.
Sales staff may be asked to fulfill on-
line orders during what would oth-
erwise be idle time. They need
training to use the retailer’s order-
taking technology and must learn
how to locate, pack, and label items
for shipment. New approaches to
sales personnel compensation (espe-
cially at commission-heavy retailers)
may also be required.
Develop robust logistics part-
nerships.
It’s critical to select a
transportation partner (or partners)
capable of picking up parcels later in
the evening than is currently typi-
cal, closer to store closing times of
9 to 10 p.m. Transportation part-
ners might not enthusiastically offer
late-night service, but the retail in-
dustry accounts for a substantial
amount of their delivery business—
which gives them a vested interest in
helping traditional retailers compete

with e-tailers.
Send a strong marketing mes-
sage.
A large-scale marketing cam-
paign is important in helping retail-
ers spread the word about a next-day
delivery offering, and in articulating
the benefits of ordering from the
company’s website instead of from
an e-commerce competitor.
Managing bricks-and-mortar
stores has so consistently been
framed as a disadvantage that it’s
easy to underrate the value of physi-
cal proximity to customers. In reali-
ty, these stores may be just the ad-
vantage retailers need to gain an
edge over their online competitors.
A handful of retailers are already ex-
perimenting with the “store-to-
home” concept, mostly to move out-
of-season stock and leverage idle
sales capacity—but not to fulfill or-
ders in the evenings and get them to
the customer’s door the next day. As
Amazon, eBay, and Google push ag-
gressively into rapid delivery, tradi-
tional retailers must not hesitate to
respond. The storefront advantage is
real, but it’s not permanent.

+
Reprint No. 00213

Curt Mueller

is a partner with Booz & Company and
leads the firm’s supply chain practice. He
is based in Chicago.
Andrew Schmahl

is a principal with Booz & Company’s
engineered products and services practice,
and is based in Chicago.
Andrew Tipping

is a partner with Booz & Company
and leads the firm’s U.S. transportation
practice. He is based in Chicago.
Also contributing to this article were
Booz & Company partner Scott Corwin
and principal Umut Aytekin.
A Rapid Delivery Strategy
Admittedly, this distribution strate-
gy will not be easy for any retailer,
and each needs to consider a range
of questions: Which product catego-
ries are most sensitive to delivery
speed? How do our customers’ needs
change during the peak holiday sea-
son? Are time-definite delivery win-

dows more valuable to our custom-
ers than overall speed?
Execution of this strategy,
which would likely take several
months to implement, will require
retailers to take a cross-functional
approach that involves thoughtful
planning, IT investments, and close
ties with transportation partners.
Most important, it must treat stores
and their inventory differently—not
as a burden but as a source of com-
petitive advantage. The following
steps can help retailers get started.
Coordinate across channels.
Senior leaders must commit to
tearing down the last remnants of
silos between offline and online
domains. Full cooperation across
The Rapid Delivery Win-Win
By leveraging local stores as distribution
centers, retailers can significantly decrease the
gap between their cost to deliver and the
consumer’s willingness to pay.
$10
$5
$15
$20
Estimated transportation cost to deliver,
in US$

1 hour 3 days 4–5
days
Same
day
Standard
overnight
Consumer’s
willingness
to pay
Potential new
cost to deliver
2 days
Source: Booz & Company analysis
leading ideas
9
leading ideas
Illustration by Matthew Hollister
MySpace. Internet Explorer elimi-
nated Netscape and enjoyed a run of
dominance, but now is threatened
by Google’s Chrome. Yet those
companies with staying power can
grow to dominate industries in ways
that can veer toward monopolis-
tic—and earn supernormal profits.
It’s a concept known as tipping.
When a platform market tips, a
single winner emerges: Google in
search, Microsoft Windows in busi-
ness computing. Not all markets tip

to a single winner quickly, but when
they do, the effects are dramatic.
Winners gain an outsized share of
revenue and profit, and those that
achieve long runs of supremacy
learn to use their advantage to build
greater and greater strength.
The tipping phenomenon hing-
es on a business’s ability to convene
many users—and often a wide vari-
ety of them—on both sides of its
market. Microsoft’s Xbox 360 game
console would not be very successful
if it had only one gamer using its
product and one developer creating
programs. Nor would it enjoy en-
during success if it had 1 million
software developers but only one
gamer. A platform strategy needs
many users of both types. Further,
the platform increases in value to
potential users as it attracts more of
each type. The more sellers on eBay,
the greater the selection of products
for buyers. The more buyers, the
The High
Risk of
Platform
Markets
Companies like dating

sites and online auctions
that link complementary
partners can dominate
for years or be swept
away in an instant.
by Dylan Minor
P
latforms are market struc-
tures that bring together
complementary partners.
Think eBay, which pairs buyers and
sellers online, or credit cards, which
similarly connect consumers and
the companies with which they
want to do business. Platforms en-
able all sorts of relationships: Apple’s
iOS joins mobile software program-
mers and iPhone users; myriad on-
line dating services couple potential
life partners. In short, any company
that matches two sides of a market is
a platform.
Everyone uses platforms, and
company fortunes are made and lost
through them, but the dynamics of
how platforms operate and how
winners emerge remain little under-
stood—even among those organiza-
tions whose very existence depends
on them.

Indeed, central to the strategy
of any platform business is the
imperative to simply survive. A
quick survey of business history
shows how easily platforms come
and go. Facebook handily displaced
more attractive the market for sell-
ers. It’s a system that can quickly
feed on itself and lead to tipping.
But how that winning firm is
selected is an inherently difficult
question. Indeed, it is hard to dis-
cern whether a platform-based mar-
ket is in the process of tipping until
we actually witness that it has tipped.
To address this challenge, my col-
leagues and I ran a series of econom-
ic experiments in which subjects rep-
resenting both sides of a market were
given the option to choose among
multiple competing platforms. Sub-
jects received initial financial incen-
tives for choosing each platform that
increased as more of each type of
user gravitated toward a given plat-
form (to represent the rising value of
the platform based on participation).
But we also informed subjects that
one platform was superior in its abil-
ity to match users.

Prior to the experiment, it was
not obvious that all users would
eventually migrate to the superior
platform, because—as is found in
practice—we also instituted switch-
ing costs. For example, once some-
one becomes a Facebook user, the
cost of transferring from Facebook
to a new social network is, at a min-
imum, the cost of learning how to
use the new platform. There is also
the cost of giving up all of one’s
connections. Hence, the challenges
faced by Google+.
leading ideas
10
leading ideas
10
strategy+business issue 73
active yoga programs. Where differ-
ent platforms serve different sectors
of the market, multiple platforms
can coexist.
Of course, that’s only at one
level. When you define most seem-
ingly heterogeneous markets one
layer deeper—where customers with
similar tastes reside—you’ll find
most platforms do, in fact, tip. Thus,
one essential element of success is

accurately defining the market you
intend to dominate: Is it video-game
consoles or video-game consoles for
sports enthusiasts? The former serves
a heterogeneous market, the latter a
homogeneous one.
This prompts other questions:
How can you identify a platform
market that is attractive to enter,
and under which conditions is it ap-
pealing? If you seek to enter a mar-
ket serving a relatively homogeneous
set of customer needs—such as
computer operating systems or cred-
it card platforms—you must come
equipped with a competitive advan-
tage that allows you to provide a
match between users (or an im-
proved pricing scheme) that can
overcome switching costs. When a
market has not yet tipped, this can
be a successful strategy. If the cur-
rent market has already tipped to a
dominant platform, however, it will
be considerably more difficult to si-
multaneously pull enough users on
both sides of the market away from
the current winner. Imagine an en-
trant wanting to displace eBay. Few
sellers would want to join a new site

with no buyers, and few buyers
would join a site with no sellers. The
form to bring users to the other.
Consider a nightclub that is attract-
ing a disproportionately large per-
centage of men. It could waive en-
trance fees for women or offer other
incentives such as drink specials in
order to attract more women. We
know this as “Ladies’ Night.”
Once a platform market tips,
the winner can consider modifica-
tions to its fee strategy. Netflix used
to offer unlimited video streaming
as a benefit for subscribers of the
company’s DVD rental services.
However, after amassing an enor-
mous user base, it now charges sepa-
rately for streaming.
Despite the long history of tip-
ping, some platform markets seem
impervious. The gaming console
market appears to be stable with
three platform companies: Ninten-
do’s Wii, Microsoft’s Xbox 360, and
Sony’s PlayStation 3. Under what
conditions can firms coexist in a
platform market, escaping the doom
(or missing the riches) of a single,
surviving market leader?

We repeatedly found one condi-
tion that allowed multiple platforms
to coexist for the long run or at least
give the appearance they were doing
so: heterogeneous consumer tastes
within a given market. Dating sites
provide a strong example: eHar-
mony, JDate, ChristianMingle, and
Cougar Life each aspire to connect
two sides of the romance market,
but each serves a different preference
among a diverse customer base. And
in the gaming market, some users
are seeking graphically intensive war
games, while others want physically
We found, however, that despite
allowing for switching costs, over
time users ultimately all choose the
superior platform. This suggests
that the winner will be decided by
the platform that can provide the
most value to both of its user types.
This result persists even when we al-
low an inferior platform to have a
head start—to gain dominant mar-
ket share and lock in customers who
want to avoid switching costs. Per-
haps, then, there is hope yet for
Google+, assuming it can deliver the
kind of step change in user experi-

ence that Facebook delivered in
comparison with MySpace.
How does a platform business
achieve a better value proposition
than its rivals? The primary factors
are increasing the quality of matches
between complementary users and
charging the most competitive fees.
Examples of the first variable in-
clude eHarmony’s promise of a
superior pairing through its ad-
vanced user profiling process or
eBay’s user-generated ratings of sell-
ers and buyers.
With respect to fees, there are a
host of options. The two main class-
es are one-time charges to “join” the
platform and those based on usage
(such as transaction fees, service
charges, and pay for placement).
One could also charge fees based on
match quality. Although less fre-
quently employed, this strategy of-
fers interesting potential. For in-
stance, when the band Radiohead
used its online delivery platform to
provide downloads of its album In
Rainbows in 2007, users paid what-
ever they wanted according to what
they perceived as its value (or the

quality of the match between album
and fan).
Sometimes it makes sense to
forgo fees on one side of the plat-
Imagine an entrant wanting to displace eBay.
Few sellers would join a new site with no buyers,
and few buyers would join a site with no sellers.
leading ideas
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value proposition would have to be
overwhelming.
Entering markets serving more
diverse customers could prove more
promising, as there are multiple pos-
sible submarkets to enter (or create),
and the power of any dominant play-
er in a submarket will likely be less
than that of a dominant player in
a homogeneous single market. It’s

much easier, for instance, to provide a
new, compelling twist on a dating site
than to provide a new search engine.
The growth rate of technology-
based businesses ensures that plat-
forms will become an increasingly
prevalent mode of operating in the
marketplace, which raises important
questions for your business strategy.
Are you competing within a plat-
form marketplace? Consider all the
facets of your business. Even if your
core business is not platform-based,
supporting elements could be. If and
where you are engaged in platform
markets, could you be “tipped out”
by a stronger player? Are you primed
to dominate? Is the market homoge-
neous or heterogeneous? Can you
define new segments? How do com-
petitors stack up?
Unless your platform business
has a distinct and recognized advan-
tage, long-run success is unlikely.
But those firms that provide a supe-
rior match between users in the
most economically efficient fashion
can become the sole dominant play-
er in their industry, enjoying mo-
nopoly-like profits with a dimin-

ished threat of competitive entry
from others.
+
Reprint No. 00218

Dylan Minor

is an assistant professor of managerial
economics and decision sciences at
Northwestern University’s Kellogg School
of Management.
leading ideas
12
leading ideas
12
Photograph courtesy of Jonah Berger
observable, so that it can be imitat-
ed, you make it more likely that
your idea will catch on. When some-
thing has practical value—when it is
useful—people share it with others
to help them. And finally, stories en-
able you to wrap your product or
idea in a narrative that carries your
brand along for the ride.
S+B: What does this mean for
companies’ marketing strategies?
BERGER: Marketers often believe
that they need to tell people why
they should buy a product or focus

on features that will benefit con-
sumers. But people don’t want to
share things that look or sound like
ads. One of the biggest problems to-
day is that companies spend way too
much money on traditional advertis-
ing. They need to shift to thinking
about how to turn customers into
advocates—how they can get the
people who use and like their prod-
uct to share with more individuals,
both online and off.
To get that to happen, however,
you have to understand why people
are talking in the first place. This is
where science comes in.
S+B: How does that tie into other
ideas about social spreading?
BERGER: I read Malcolm Gladwell
when I was in college, and it inspired
me. But The Tipping Point doesn’t
talk about how to get more word of
mouth. It popularized the idea of so-
cial epidemics, but it didn’t explain
why people talk about some things
rather than others. A good analogy
is that social epidemics are like cars.
They can go fast, but only because
of the engine—and word of mouth
is that engine.

People tend to read The Tipping
Point and think that if they just find
the mavens, the connectors, and the
Jonah
Berger
Is Over
Twitter
How the science of
social transmission will
help your brand catch
on—and why tweeting
alone is not enough.
by Laura W. Geller
S
ocial media will carry your
company’s marketing strat-
egy into the future, guaran-
teeing that more and more people
will engage with your brand and
purchase your products. Right?
Tempting as that is to believe, says
Jonah Berger, associate professor
of marketing at the Wharton School
of the University of Pennsylvania,
companies routinely expect too
much from their mere presence on
platforms like Facebook and Twit-
ter. Berger warns that many compa-
nies are getting caught up in the
hype and ignoring the important

question: Why do certain brands go
viral, while others lag?
In his new book, Contagious:
Why Things Catch On (Simon &
Schuster, 2013), Berger, who has a
psychology background, codifies his
framework for understanding and
marshaling the power of word of
mouth—the willingness of people
to spread your message—to reach
and influence customers. It’s a
marketing strategy that his research
has shown to be 10 times as
effective as traditional advertising.
Berger recently sat down with
strategy+business to explain why gen-
erating word of mouth is more im-
portant than accumulating likes and
followers.
S+B: In Contagious, you posit that
there’s a science behind why certain
things spread.
BERGER: For the past decade, I’ve
studied word of mouth—why people
talk about certain brands more than
others. It’s not random; there’s a
structure behind it, a formula. And
if we understand that formula, we
can be much more effective. Again
and again, I found the same six key

drivers: social currency, triggers,
emotion, public, practical value,
and stories.
Social currency is the idea that
people are more likely to talk about
something the better and smarter it
makes them look, and the more spe-
cial it makes them feel. Trig gers are
why peanut butter makes us think
of jelly—linking products and ideas
to cues in the environment increases
word of mouth. The more you can
get people fired up, excited, or even
feeling negative about something,
the more likely they’ll be to pass it
on: That’s emotion. Public refers to
the idea that by making behavior
Jonah Berger
leading ideas
But don’t forget that most word of
mouth happens offl ine. Face-to-face
conversation is still the original so-
cial media.
So companies need to make
sure they also have an offl ine strat-
egy. Optimizing giveaway programs
is a great way to encourage people
to do the targeting for you. The av-
erage American engages in more
than 16 conversations daily in

which they talk about a product or
service. And there are companies,
like BzzAgent, that are in the busi-
ness of making your brand one of
them. If I’m a dog food company,
and I sell my big bag of dog food,
maybe I also give people a little trial
bag that they can give to a friend.
Rather than you fi guring out who
has a new dog, why not let people
do it with their own friends? They
have the best sense of who’s going to
like your product—much better
than you do.
“Liking” something is a passive
action. What you really want is that
engagement, where people are au-
thentically sharing your brand with
others. Twitter, in some ways, is the
new television. At one point, when
there weren’t a lot of advertisements
on TV and there weren’t a lot of
channels, you could get your mes-
sage out through that medium. But
that’s clearly changed. Similarly, to-
day there’s so much clutter on these
various online channels that it’s un-
likely your message gets out to very
many of your followers. In fact, on
a good day, your tweet may get out

to 1 or 2 percent of the people who
follow you.
salesmen, they’ll be done. But there’s
no data to suggest that certain peo-
ple are repeatedly more infl uential
than others in a way that marketers
can use.
Rather than focusing so much
on the messenger, we really need to
think about the message. Sure, some
people have 10,000 followers, and
some people are more persuasive
than others. But there are many
more everyday Joes and Janes who
have 10 friends or 100 friends rather
than 10,000. Marketers need to
think about how to get them talking
as well.
S+B: You write that only 7 percent
of word of mouth happens online.
Has the signifi cance of social media
been overhyped?
BERGER: Too many companies set
up a Facebook page and a Twitter
account and assume they’re done.
“We must be successful! We have
a social media department!” That’s
not a strategy. Companies get se-
duced by their numbers of followers
and likes. They think, “We got more

followers today; we’re doing a great
job.” But at the end of the day, is that
getting them increased sales, is that
bringing them new customers? The
problem with online is it has encour-
aged people to mistake activity for
productivity. “Just because we’re do-
ing something, it must be the right
thing.”
Now, that 7 percent statistic
doesn’t mean that online and digital
aren’t important. Of course they
are—particularly if your product
generates most of its sales online.
Hear from the best
minds in business on
the brain science of
strategy, the digital
economy, what makes
brands go viral,
and more
s+b
thought
leaders
“There’s so much clutter on online channels.
On a good day, your tweet may get out to 1 or 2
percent of the people who follow you.”
leading ideas
14
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14
strategy+business issue 73
S+B: What’s the next frontier in
terms of behavioral research and
marketing?
BERGER: One thing that my col-
leagues and I are thinking about
now is how the different channels
that we use for sharing affect what
we say. Face to face, we don’t want to
sit in silence, so we say anything to
pass the time. But online is a written
medium, which allows us more time
to construct and refine what we
want to pass on. We curate our on-
line identity. We can delete our post,
we can revise our post, or we can de-
cide not to send it.
Online it’s much more about so-
cial currency—how is this going to
make me look (and if it won’t make
me look good, how can I revise it),
whereas offline it’s much more about
triggers—what’s top-of-mind that
can fill the conversational space. By
carefully considering how people
share in a given context, companies
can better design their messages for
that context. Tailoring messages
based on the communication chan-

nel will be essential for marketers.
+
Reprint No. 00217
Laura W. Geller

is senior editor of strategy+business.
She’s @lwgeller on Twitter.
S+B: Who’s doing it right?
BERGER: Recently, LinkedIn sent
out a note to some of its users alert-
ing them that they had one of the
top 5 percent or 10 percent of pro-
files [in terms of viewership]. It made
people feel special. But instead of
just patting themselves on the back,
thousands of people shared that
message with others. It’s pure social
currency.
LinkedIn made those people
feel like insiders, like they had
status, and they crowed about that
status to everyone else to take ad-
vantage of it. Status is only good if
other people know you have it. But
LinkedIn got to come along for the
ride. It wasn’t just that people were
saying, “I’m great.” They were say-
ing, “LinkedIn said that I’m great.”
LinkedIn got to be part of that mes-
sage—that story.

Plenty of offline companies are
successfully prompting word of
mouth as well. For example, we can
see triggers in action with Geico’s
“Hump day/happier than a camel
on Wednesday” campaign. Geico
was trailing far behind Progressive a
few months ago, in terms of online
search. But after this campaign
came out, Geico took the lead.
There’s a big spike for this cam-
paign, in particular every Wednes-
day. Hump day rolls around, and it
reminds people of the ad and of
Geico. They go searching for the ad,
they share it with others, and it helps
build word of mouth about the
brand. As a result, that ad is one of
the most viral, most shared ads on-
line at this moment.
Waiting for
the Digital
Grid
The modernized grid
should revolutionize
the way electricity is
distributed and used,
but its potential hasn’t
yet been realized.
by Don Dawson, Earl Simpkins, and

Josh Stillman
T
here have probably been a
few times when you’ve
opened your electric bill and
been shocked at the amount you
owe. But in the future, widespread
implementation of the digital elec-
tric grid may help you avoid such
moments. Your smart meter would
tell you how much electricity you’re
using and when. It could also help
you offset costs by running your
dishwasher during off-peak electric-
ity hours or turning off your living
room lights if you forget to. If you
have a solar panel or wind turbine
on the digital grid, you might even
find yourself selling electricity back
to the power company.
Smart meters are among the
more visible signs of the digitized
grid. Utilities have begun installing
them at customers’ homes, and pow-
er companies are already sending
consumers monthly notices compar-
ing their electricity consumption to
that of their neighbors. In fact, about
33.5 million smart meters have been
installed in the United States, repre-

senting 25 to 30 percent of residential
utility customers. Installation rates
approach 75 percent in some areas,
“By carefully considering how people share in a
given context, companies can better design their
messages for that context.”
leading ideas
Illustration by Grant Snider
a range of concerns, mostly un-
founded, about the costs and privacy
implications of automated metering.
Smart meters have also been blamed
for making people sick—with ail-
ments as varied as headaches, arthri-
tis, and high blood pressure. Even
recurrences of cancer are being
pinned on the technology. Consum-
er backlash ensued, slowing smart-
meter deployment in some states
and undermining utilities’ messages
about the grid’s benefits.
To recover the momentum,
much depends on each utility’s incli-
nation and ability to make necessary
investments. Industry studies sug-
gest that full digitization of the U.S.
electric grid could cost between
US$338 billion and $476 billion,
many times the estimated $8 billion
invested in digital technologies so

far. Utility investment decisions will
depend to a large degree on the will-
ingness of regulators to add digital
infrastructure costs to customers’
bills. Regulatory attitudes will mir-
ror public perceptions.
Moreover, many of the early in-
vestments have been in front-end
and full penetration across the coun-
try could happen by 2020.
But smart meters are only a
starting point. A fully realized digi-
tal grid requires a panoply of new
hardware and software throughout
the power distribution network, and
infrastructure that can support and
maintain it. Utilities have just begun
to install these network compo-
nents. And the technology needed
to update the electric infrastructure
has yet to be fully developed. Com-
pleted rollouts of digital grid tech-
nology will take several years, and
the pace will vary among both states
and utilities. Although digital grid
technology should be a win-win ad-
vancement in utilities manage-
ment—generating cost savings and
efficiency gains for both customers
and their utilities—thus far it has

failed to live up to its full potential.
We’re Not There Yet
Despite the promise of the digital
grid to help with problems like
power outages and high electric
bills, most utility companies and
their customers have yet to see the
concrete benefits. In fact, few com-
panies are offering any of those in-
novative services—like home auto-
mation—that the digital grid is
supposed to spawn.
What happened? Many in the
utility industry wonder if the hype
around digital grid technology out-
paced individual utilities’ ability to
deliver or got ahead of regulatory
willpower to support the needed in-
vestments through rate hikes. The
first wave of smart-meter installa-
tions fueled expectations that falling
rates and amazing new services
would soon follow for businesses
and consumers alike.
But when those expectations
weren’t met, the door was opened to
communications and data-gathering
technologies. But to move the grid
forward, utilities need to focus on
the capabilities that create benefits

for their customers by investing in
back-end analytics that make sense
of front-end data—translating that
data into meaningful customer
insights. These insights, in turn,
will help utilities tailor products
and services to better meet custom-
ers’ demonstrated and potential
electricity usage.
A survey of U.S. consumers in
2012 by the Edison Electric Insti-
tute found that only 45 percent of
respondents knew the term smart
grid, and barely half of those famil-
iar with the term felt they under-
stood how digital grid technology
worked and what it could accom-
plish. Consumers often take a
skeptical view of new technologies
they don’t fully understand. Utilities
can counter this skepticism by edu-
cating customers on the benefits and
risks of the digital grid (including
the operational benefits it provides),
setting realistic expectations, and
addressing consumers’ concerns.
15
leading ideas
leading ideas
16

leading ideas
16
hours when rates are lower. Al-
though few consumers relish the
prospect of turning on the dish-
washer at 3:00 a.m., home automa-
tion technology eventually will take
over the chore of managing power
consumption for optimal pricing.
And as more people spread out their
consumption, price spikes at times
of peak demand could stabilize.
Supply–demand integration.
Digitization turns traditional one-
way power distribution channels
into two-way streets. Today, most
electricity is generated at a utility’s
power plant and sent over the grid to
customers. That will change as new
technologies enable power to flow
back into the grid from alternative
energy sources.
Customers who install solar
panels on their roof or erect a wind-
mill on their property can offset
electricity costs by selling some pow-
er back to the utility. At times of
heavy demand, customers with on-
site power-generating capabilities
can also save by switching to their

own power source, in response to a
warning signal from the utility that
rates are peaking.
Product and service innovation.
The interactive capabilities of intel-
ligent electric networks open the
door to a wide range of new prod-
ucts and services that will help cus-
tomers use electricity in new ways.
The relationship that now ties cus-
tomers to utility companies will be-
come more open, encompassing a
range of vendors that will provide
hardware, software, and services for
the digital grid. These offerings will
help consumers understand their
electricity use and capitalize on digi-
tization to squeeze more value from
the wattage they consume.
Network automation and utility
efficiency.
Grid digitization im-
proves operating efficiency at utili-
ties. Smart meters are already
reducing the need to send techni-
cians out for routine matters such as
service activations and shutoffs, and,
of course, meter reading. As utilities
become more efficient, they can re-
spond faster to customer needs.

Greater efficiency can also slow the
rise of electricity costs over the long
term. As electric grids become smart-
er and more efficient, utilities won’t
need to spend as much money on
improvements to infrastructure and
other projects that require significant
capital investment. Cost reductions
for the power companies mean cus-
tomers won’t see rate increases in
their bills that are meant to recoup
expenditures for the utilities.
There are many shoulds and
coulds when it comes to the digital
grid. But in the end, it will take
commitment and investment by the
utilities to turn this vision of a more
energy-efficient and cost-effective
future into reality.
+
Reprint No. 00201

Don Dawson

is a partner in Booz & Company’s digital
business and technology (DBT) practice,
and leads the firm’s energy, chemicals,
and utilities DBT practice in North
America. He is based in Dallas.
Earl Simpkins

is a partner with Booz & Company’s
energy, chemicals, and utilities practice,
and is based in Dallas.
Josh Stillman

is a senior associate in Booz & Company’s
energy, chemicals, and utilities practice,
and is based in Dallas.
Also contributing to this article were Booz
& Company partner Joseph Van den Berg
and senior associates Art Davidson and
Jag Mukherjee.
Smarter Is Better
The obstacles are numerous, but
given the possibilities this technolo-
gy offers, the widespread implemen-
tation of the digital grid should be
an imperative for utilities in the
United States and around the world.
Here’s a look at what could happen.
Reliability. With a digital grid in
place, power companies would no
longer have to wait for customers to
call in and report a loss of service.
The utility could immediately dis-
patch service crews to restore power
whenever and wherever the network
infrastructure detected an outage.
This would also avoid the costly and

time-consuming process of sending
restoration crews into the field to pa-
trol power lines in search of trouble
spots. At the same time, notifica-
tions would automatically go out to
customers through the Web and so-
cial media, followed by progress re-
ports with time estimates for power
restoration. This is one of the first
digital grid technologies being de-
ployed today, though it is still limit-
ed in scope.
Digital technologies also hold
the promise of preventing outages.
Over time, utilities will implement
self-healing capabilities that reduce
the frequency, scope, and duration
of power loss. Sensing mechanisms
in the network will sniff out trouble
before it can cause an outage, en-
abling the power company to act.
Pricing. Digitized electric net-
works will give customers the infor-
mation they need to manage their
power consumption and cut their
electric bills. The system tells cus-
tomers how much power they’re us-
ing at various times of the day, and
how much electricity costs at each
time interval. This information re-

veals opportunities to save money by
shifting more power usage to the
strategy+business issue 73
leading ideas
Illustration by Stefanie Augustine
sought-after speakers at conferences.
And the leadership industry, as Har-
vard’s Barbara Kellerman dubbed it,
was off and running. “Teaching
how to lead is where the money is,”
she said.
A by-product of all this leaderli-
ness, as Stephen Colbert might call it,
has been a proliferation of leader la-
bels and a gutting of the understand-
ing of what it actually means to be a
leader. Thus, we have created and
perpetuated a self-fulfilling down-
ward spiral of disappointment: We
call more people leader, or they take
that title themselves, and then we’re
shocked—shocked!—when they fail
to provide leadership.
We can, however, begin to re-
verse this sad state of affairs through
simple language: Let’s stop calling
people leaders until they demon-
strate that they truly deserve the
appellation. When I speak on behalf
of Harvard’s National Preparedness

Leadership Initiative (NPLI), I make
these distinctions:
17
leading ideas
Let’s Stop
Calling
Them
Leaders
Executives, officials,
and managers
should have to earn
the title of “leader,”
not just expect to
receive it.
by Eric McNulty
W
e are surrounded by
ineffective leadership.
According to the most
recent National Leadership Index
from the Center for Public Leader-
ship at Harvard’s Kennedy School of
Government, 69 percent of Ameri-
cans think that the country faces a
leadership crisis. The good news is
that’s down eight points from 2011.
But 69 percent doesn’t earn anyone a
gold star.
In this new study, just two sec-
tors rate above average in leadership

confidence: the military and medi-
cine. Only the military has had a net
gain in confidence since 2005, when
the survey was first conducted. Busi-
ness leaders are generally in the mid-
dle of the pack of below-average per-
formers, but a subset of them—Wall
Street’s supposed leaders—is keep-
ing company with Congress and the
media down in the basement of pub-
lic confidence.
I believe that part of our leader-
ship problem and, more important-
ly, part of the solution is linguistic.
In the landmark 1978 book
Leadership (Harper & Row), author
James MacGregor Burns focused
almost exclusively on political lead-
ers because he felt that the ability
of followers to exercise choice be-
tween potential leaders (for exam-
ple, by voting in an election) was a
prerequisite for leadership. Com-
pelled obedience—whether it is
compelled by physical force, finan-
cial threat, or other means—simply
didn’t qualify as leadership. Busi-
ness executives received but scant
attention. Their job, after all, was
management. And although em-

ployees may freely choose to join
or leave a firm, their time between
those two events involved little
choice about whom to follow.
Shortly thereafter, business en-
tered an age when companies were
reorganizing for efficiency. Paper-
pushing middle managers became
vulnerable and expendable. But
leaders had vision and made critical
decisions. It was good to be a leader.
After all, how could a firm part with
such a valuable individual?
Leadership books and leader-
ship development programs grew
in popularity. Senior management
teams became known as senior lead-
ership teams. Leadership gurus were
A by-product of all this leaderliness has been
a proliferation of leader labels and a gutting
of the understanding of what it actually means
to be a leader.
Best of the s+b Blogs

leading ideas
18
leading ideas
18
strategy+business issue 73
s+b Trend Watch

turkey. Let’s just stop calling people
leaders when they fail to lead. We
can call them executives, high-rank-
ing offi cials, or senior managers.
Those monikers will salve their egos
as they acknowledge their lofty for-
mal roles. Let’s reserve the meaning-
ful designation of leader for those we
choose to follow. Perhaps then more
of those who aspire to be leaders will
work harder to earn the title.
+
Eric McNulty

is the director of research at the National
Preparedness Leadership Initiative and
writes frequently about leadership and
resilience.
translating them into everyday
speech and writing is more diffi cult
than it looks. Leader is an easy han-
dle for a senior-level person who
works across private, public, and
nonprofi t sector contexts. Leader has
an appealing, aspirational ring to it.
This is why it has been so seductive,
and once we were seduced, our
hearts were bound to be broken.
No matter the diffi culty, we owe
it to ourselves to stop. Today. Cold

Leadership is based on behavior
and independent of role or rank.
Just
because someone has a fancy offi ce
or an important-sounding title, they
are not automatically imbued with
the ability to lead. Certain roles may
come with the expectation that
whoever holds them will be able to
lead, but I have worked for CEOs
who fell horribly short and with
strong leaders who were offi cially
seated deep in the formal hierarchy.
You likely have as well.
Leader is a mantle earned, not
taken.
The founding codirector of
the NPLI, Leonard Marcus, cham-
pions what he calls the world’s
shortest defi nition of leadership:
People follow you. No matter what
you call yourself, you aren’t leading
if no one is following. Leadership is
as much about followers as it is
about who they follow; it is in their
power to anoint a leader.
Leadership is more about the
why than the what.
People who get
organizations to deliver on the

quarterly numbers or meet produc-
tion goals are good, maybe even
great, managers. Management is
challenging—and doing it well
should be rewarded. But only when
you dig deeper to discover whether
employees are invested in the pur-
pose and mission of the organiza-
tion will you discover how well they
are being led. I see management
and leadership as complementary
skills. Strong leaders know at least a
bit about how to manage and strong
managers know something about
how to lead.
As straightforward as I believe
each of these distinctions to be,
Chinese companies are raising their
global profi le—they now export goods
at the same rate as foreign-funded
companies operating in China do. And
their future looks ever more global: In
a recent survey of Chinese executives,
88 percent said they expect to be
conducting product development for
foreign markets by 2023.
Chinese Companies Reclaim “Made in China”
All Chinese
companies
Total exports of goods produced in China

Foreign-funded
companies
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
200
0
400
600
800
1,000
$1,200
US$ BILLIONS
Chinese state-owned
Chinese
non-state-owned
China loosens
foreign trade
restrictions
Source: “An Emerging Innovation Power: 2013 China Innovation Survey,” Sept. 2013, booz.com/made-in-china;
General Administration of Customs of the People’s Republic of China; Booz & Company analysis
No matter what you call yourself, you aren’t
leading if no one is following.
by Tim Laseter and
Jeremy Hutchison-Krupat
F
or business executives, sep-
arating true technological
breakthroughs from wish-
ful thinking is inherently challeng-
ing. As Danish physicist Niels Bohr

stated, “Prediction is very difficult,
especially about the future.” Most of
us can recall examples of misguided
technology predictions great and
small, such as the Internet bubble
and the Segway. Perhaps the best
example today of an innovation
whose surrounding hype may be ob-
scuring its substance is 3D printing.
It thus provides an ideal case study
on the importance of applying time-
tested forecasting tools before get-
ting too caught up in new-technol-
ogy excitement.
Claims that 3D printing (also
known as digital printing) is poised
to shake up the manufacturing in-
dustry in dramatic fashion have been
on the rise. A September 2013 report
from investment advisor the Motley
Fool even went so far as to assert
that the new technology will “close
down 112,000 Chinese factories
and launch a 21st-century industrial
revolution right here in the U.S.A.”
As much as we would like to see
manufacturing return to West-
ern shores, we’re a bit less sanguine
than the prognosticators. Indeed,
before we send pink slips to mil-

lions of Chinese workers, we need
to step back and analyze 3D print-
ing through the lens of the experi-
ence curve, and how it both drives
and responds to consumer adoption
of new technologies. And before we
predict widespread change to the
manufacturing industry’s structure,
we must reflect on how economies
of scale and total landed cost drive
investment decisions.
There’s no question that 3D
printing offers a new manufactur-
ing model. It eliminates the need
for expensive, customized tooling.
And as an additive manufacturing
approach rather than a subtractive
one, it uses less material. The cost of
digital printers continues to decline;
startups are now offering hobbyist
versions for less than US$250. But as
our technology forecasting analysis
will show, 3D printing isn’t poised to
take the place of factory production
anytime soon.
Tools of the Trade
One of the most effective tools for
forecasting technology dates back
to the observations of aerospace en-
gineer Theodore P. Wright. He be-

gan his career with the U.S. Navy
Reserve Flying program, where he
received pilot training and became
an aircraft inspector. He later joined
the Curtiss Aeroplane Company,
eventually rising to vice president
of engineering. In 1936, Wright
published an article in the Journal
of Aeronautical Sciences in which he
offered a mathematical model for
predicting cost reductions over time
based on years of observing airplane
manufacturing. Specifically, he pro-
posed that the number of labor
hours required for building an air-
plane declined predictably as a func-
tion of the cumulative number of
units produced because of the in-
creases in skill and efficiency that
came from experience and prac-
tice. For every doubling of cumu-
lative unit production, the number
of labor hours dropped by a fixed
percentage. Wright’s resulting expo-
TECHNOLOGY
A Skeptic’s Guide
to 3D Printing
Excitement about any new technology should
be balanced with the application of time-tested
forecasting tools.

20
Illustration by Lars Leetaru
essay technology
nential curve, dubbed “the learning
curve,” drops swiftly initially, but
eventually flattens as the number of
units required to double cumulative
production grows large.
In the 1960s, Bruce Hender-
son, founder of the Boston Consult-
ing Group, built on Wright’s idea
with the concept of “the experience
curve.” He argued that the expo-
nential curve could be extended to
a broader range of products if one
focused on the total manufacturing
cost per unit rather than merely the
labor cost. Around the same time,
Gordon Moore, director of research
and development for Fairchild Semi-
conductor Inc., made an observation
based on his deep industry knowl-
edge of computer chips. But Moore
used time as his driving factor rather
than cumulative production vol-
ume. He asserted that the number
of transistors per computer chip had
doubled every year and would con-
tinue to do so for another 10 years,
thereby reaching what seemed a

mind-boggling total of 65,000 tran-
sistors on a single chip.
Revisiting the data in 1975,
Moore—who by then had co-
founded Intel Corporation—noted
that his prediction proved correct
but adjusted his future forecast to a
doubling every two years. Despite
ongoing debates about the limits of
what has become known as “Moore’s
Law,” a steady rate of improvement
continues to drive the microproces-
sor industry; the latest generation
of chips contain well over a billion
transistors.
Researchers continue to test
and confirm the empirical validity
of these tools even today. In a paper
released in early 2013, a team of re-
searchers from the Santa Fe Institute,
a think tank dedicated to complex-
ity science, collected and examined
data sets on cost and production
volumes for more than 60 technolo-
gies over various time frames. One
set covered integrated circuits from
1969 to 2005. The researchers found
that the cost of a transistor in a chip
dropped 43 percent with every dou-
bling of cumulative volume and that

the cumulative production doubled
at a rate of every 1.2 years over the
37-year period. Their full data set
shows that many technologies ex-
hibit both a steady rate of volume
doubling and a steady rate of cost
decline (measured as the slope of the
logarithmic curve), making Moore’s
Law and Henderson’s experience
curve effectively indistinguishable.
However, they also found that
the rate of change varies dramati-
cally across technologies. For exam-
ple, the evolution of hard disk drives
between 1989 and 2007 revealed
a 49 percent cost reduction with a
doubling of cumulative volume ev-
ery 1.1 years. Polystyrene, in con-
trast, dropped at only a 16 percent
rate and took 3.5 years to double in
cumulative volume from 1944 to
1968. And freestanding gas ranges
exhibited a much steeper cost curve
than polystyrene, with a 32 percent
reduction at each doubling, but cu-
mulative volume doubled only once
between 1947 and 1967.
Therefore, to predict the cost
curve of a new technology, we need
to consider both the rate of volume

growth and the rate of cost decline,
also known as the slope of the expe-
rience curve. The question becomes
this: Will 3D printing behave like a
microchip or a gas oven?

The 3D Experience Curve
Although the $250 price point for
hobby offerings of digital printing
clearly demonstrates progress down
the experience curve, the prod-
uct remains in the nascent stage of
growth. The relatively short history
of 3D printing began with the intro-
duction in 1986 of its foundational
technology, stereo lithography, by
Chuck Hull through his company
3D Systems. However, it took nearly
a decade—and advances in solid-
state lasers—before the technology
captured a foothold as a true enabler
of rapid prototyping.
Consumer applications for 3D
printing, which have more recently
garnered considerable attention, face
the traditional constraint of house-
hold penetration. This limits the po-
tential market size and accordingly
affects the likely degree of volume
doubling that is needed to drive the

experience curve to rapid expansion.
The case of similar technologies sug-
gests caution; for example, we know
that nearly a third of the households
in the industrial world have mul-
tiple televisions, but few have more
than one stove. Personal computers
offer another benchmark: Thirty
years after the technology was intro-
duced, more than 70 percent of the
To predict the cost curve of a new
technology, we need to consider
both the rate of volume growth and
the rate of cost decline.
essay technology
21
480 million households in the West
have at least one PC, as do nearly a
quarter of the 1.3 billion households
in emerging economies.
What penetration rate might
we expect for small-scale, tabletop
3D printers? The fundraising suc-
cess by startup Pirate3D on Kick-
starter Inc. offers a glimpse of the
potential. The company’s Buccaneer
home 3D printer project, promising
an easy-to-use unit priced as low
as $247, raised $1.4 million from
more than 3,500 backers in a mere

30 days, easily blowing past its tar-
get of $100,000. But comparing
3D and desktop printers offers the
best way to assess the potential pen-
etration rate. The standard printer
as we know it has fairly simple in-
puts that do not require much from
the consumer; similarly, it produces
standard-size outputs. Importantly,
a single home printer can handle
most of the variants we throw at
it. It can print black and white or
color, on 4x6 glossy photo paper
or on standard bond paper, with
reasonably high quality photos or
text. Given such versatility, it is
common for a home printer to get
extensive use.
The world of 3D printing pre-
sents a vastly different scenario. A
printer for metal cannot print ABS
plastic, and one that prints ABS
plastic may not print any other type
of plastic. And although designers
continue to make digital printers
simpler, there remains a required
minimum level of technical know-
how that is far greater than that
needed to operate an ink-jet or laser
printer. Moreover, even if we assume

digital printing will get simpler over
time, we should recall that despite
the ease and convenience home
printers offer, many people still
outsource larger jobs to FedEx Of-
fice or Staples. It’s therefore a stretch
to envision a near-term future in
which the typical consumer uses a
3D printer at home to make a plastic
fork or a chess piece rather than buy-
ing it from Walmart.
Perhaps we’re wrong, and the
3D printer will become as easy to use
and as ubiquitous as a smartphone.
If the industry produces millions of
printers per year, the high volume
would move the device down the
experience curve more rapidly—but
with how steep a curve, and how
fast would volume doubling occur?
Under even the most optimistic
forecasts, growth in digital print-
ers’ sales would pale in comparison
to the unit sales of the ubiquitous
microprocessor. Digital printing
will get cheaper, but it will likely not
have the volume to emulate Moore’s
Law. Furthermore, unlike micropro-
cessors, a 3D printer is an assembly
of various older technologies. The

microprocessor running the printer
will drop in cost rapidly, but many
of the parts, such as the actuators
moving the print head, are already
far down their own curves and have
limited further potential. And a sig-
nificant portion of the cost is in the
physical structure or casing of the
printer, which does not benefit from
miniaturization (unless you care to
print only really small items). Thus
the experience curve for 3D print-
ing is likely to be more like that of
the gas range than that of the mi-
crochip: a significant but not earth-
shattering slope, and a relatively slow
doubling.

Manufacturing Cost Drivers
Experience curves offer one way to
analyze the viability and potential of
a new technology. But assessing the
predictions of structural changes to
the manufacturing industry, such as
those prompted by the current hype
around 3D printing, requires the
application of two other well-tested
concepts: economies of scale and
total landed cost. When consider-
ing how and where products will be

manufactured, size matters, but so
do location and the cost of transpor-
tation around the globe.
The concept of economies of
scale dominated business thinking
in the early stages of the Industrial
Revolution. The theory built on
Adam Smith’s observations about
the benefits of the division of labor,
concluding that larger companies
would have greater opportunity to
create specialized labor categories.
Over time, the focus shifted away
from simple division of labor to
automation for eliminating labor.
Larger companies could invest in
advanced production technologies,
creating more output with fewer
resources. The proof of the concept
could be seen in the growth of fo-
cused corporate behemoths such as
Cadbury, General Motors, Siemens,
and U.S. Steel. During the first half
It’s a stretch to envision a near-
term future in which the typical
consumer uses a 3D printer at home
to make a fork or a chess piece.
22
strategy+business issue 73
essay technology

of the 20th century, such companies
exploited their manufacturing prow-
ess and resulting scale economies to
serve the global market.
Midway through the 20th cen-
tury, the application of scale econo-
mies to shipping helped drive the
current paradigm of extensive global
manufacturing. In 1956, truck-
ing entrepreneur Malcom McLean
purchased a shipping company to
pursue his idea of standardizing in-
termodal shipping containers. He
realized that global supply chains
could be leveraged more effi ciently
if truck trailers could be loaded onto
ships and unloaded without empty-
ing the containers and repacking the
contents. Container ships allowed
manufacturers to take advantage of
low-cost labor in developing mar-
kets by cost-effectively shipping the
goods back to developed markets.
We see all these concepts at
work today. For example, Foxconn,
a leading contract manufacturer
of consumer electronics in Shen-
zhen, China, combines scale and
labor cost advantages by employing
hundreds of thousands of work-

ers at more than a dozen factories
crammed into a three square kilo-
meter complex known as Foxconn
City. And pursuit of scale economies
continues in shipping with Maersk
Group’s launch in July 2013 of the
largest container ship to date, which
can carry 18,000 containers.
Like the experience curve, scale
economies vary for different types
of products, affecting the signifi -
cance of labor costs. Consider Intel’s
semiconductor chips, which contin-
ue to follow the “law” predicted by
the company’s cofounder. A “wafer
fab,” which manufactures the initial
silicon chip, costs billions of dollars
to build, and most of these plants
are located in developed countries
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